Understanding Force Majeure

[We are reposting this article, originally published in December 2014, to help meeting planners think ahead as the World Health Organization and others calculate the risks of the Zika virus.]

The Ebola outbreak is another in a long line of potential threats to meetings and events. What if your attendees say they’re too concerned about its potential risk to travel? Can you cancel your program? What are the legal ramifications?

As government agencies in the United States and around the world discuss quarantines and restrictions on travel to destinations where Ebola has been diagnosed, meeting organizers are fielding concerns raised by their attendees regarding air-travel safety.

The meetings industry has faced many challenges to attendee travel over and above the Ebola scare, including terrorism attacks, hurricanes, earthquakes, floods, the SARS epidemic, volcanic ash, strikes and labor disputes, and power outages, to name just a few over the last decade or so. What steps should meeting professionals take when assessing whether a meeting should be canceled based on current events — including whether they have the right to terminate their contracts without liability, or cancel and potentially owe money damages? What terms should you negotiate and include in future contracts to address the reality that bad things happen to good meetings? Here are some guidelines.

WHY ARE FORCE-MAJEURE CLAUSES SO CONTENTIOUS?

Next to attrition and cancellation-performance clauses, the wording of force-majeure clauses is the most difficult and contentious to negotiate between meeting sponsors and suppliers. That’s because the two sides view the issue differently. To a hotel, “force majeure” means it is totally impossible for the meeting to be held or for the venue, or other service provider, to provide its facilities or services. To a meeting sponsor, a “force majeure” is any act or event that occurs after the contract has been signed that materially affects the meeting and makes it substantially more difficult to stage the meeting as planned and/or attract the expected number of attendees.

These two views are not always compatible, but contracts can and should contain solutions that protect and satisfy both parties. Both sides need to insist on the inclusion of a realistic and comprehensive force-majeure clause that recognizes the realities in the world today and the complexities of getting potential attendees to attend meetings or the venue to provide its services. Before moving forward, it is important to understand the legal principles governing contracts.

Contract law provides that, absent wording to the contrary, either party can terminate its performance obligations if that party’s performance is made impossible or commercially impracticable, or the purpose of the contract is frustrated by supervening events outside that party’s control, making the value of performance worthless to that party. These legal standards apply by default when a supervening act or occurrence affects the meeting and the parties did not allocate the risk and consequences in the contract. Whether specific concerns about Ebola — or any other potential catastrophe — rise to the level of any of these three standards must be analyzed on a case-by-case basis while considering known facts and the terms of your contract.

WHAT’S AT STAKE: TERMINATION VS. CANCELLATION

As previously stated, a force-majeure event allows a party to a contract to terminate its performance obligation(s) in the agreement if one of the standards set by the legal principles is met. By definition, if a contract is terminated, all obligations cease to exist and both sides go back to the position they were in before the contract was executed. Neither party owes any further obligations to the other party. Parties to a contract can protect themselves from losses that potentially arise when a force-majeure event occurs resulting in contract termination by obtaining the appropriate insurance coverage.

A concept similar to termination is cancellation of a contract. The two terms are not the same, and that difference should be specified in every contract. By definition, a contract is canceled when one party decides not to perform the contract for reasons other than a force-majeure event. When cancellation occurs, the canceling party may owe damages to the other party to give them the benefit of the bargain, which is generally defined as the lost profits suffered by the other party (i.e., injured party), if any. The injured party must first show that it took affirmative steps to mitigate its damages by offering to resell the canceled product or service to other parties in order to reduce or eliminate the potential damages the canceling party must pay.

The decision to cancel or relocate a meeting to another location is a serious one. There are legal and financial risks regardless of the decision made, and there are no easy answers. Before a decision is made, planners must conduct proper due diligence. Here are some suggested steps:

1. Poll all stakeholders

Ask attendees, officers, exhibitors, sponsors, and vendors. What is the prevailing wisdom? Do the majority support moving forward with the meeting, or are their fears so strong based on negative perceptions that going elsewhere is the only path that makes sense? If a decision is made to move a meeting, it should be understood that contract law — and the specific terms in the existing contract — may not support canceling or relocating the meeting without the payment of cancellation damages. Each situation must be analyzed on a case-by-case basis and discussed with all parties concerned, including legal counsel.

2. Examine the viability of having the meeting

You may have fewer attendees and/or reduced support from exhibitors, sponsors, and other stakeholders. Maybe it makes sense to keep the meeting in place, even if attendance will fall short of original goals. Again, each case is different and potential contract liability must be considered.

The typical force-majeure clause in convention-industry contracts limits termination of the contract without liability to situations where it is impossible for one or both parties to perform. If your contract limits the right to terminate performance to situations where it is impossible to perform, then current realities with Ebola probably don’t support terminating a contract without liability. Your action in canceling a meeting or relocating it to another location may involve the payment of cancellation damages. Of course, this could all change if the circumstances of the disease generate quarantines or travel advisories by the Center for Disease Control (CDC), the World Health Organization (WHO), or other authority.